Miton UK Micro Cap - Half-year Report
14/12/2023 07:00
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RNS Number : 6973W Miton UK MicroCap Trust plc 14 December 2023
14 December 2023
Miton UK MicroCap Trust plc
(the "Company" or the "Trust")
REPORT AND ACCOUNTS FOR THE HALF YEAR ENDED 31 OCTOBER 2023
The Directors present the Half Year Report of the Company for the six months
ended 31 October 2023.
The Miton UK MicroCap Trust plc is an investment trust listed on the London
Stock Exchange under the ticker code MINI. The Board, which consists of four
independent directors, appoints the Investment Manager and oversees all
aspects of the Trust.
The Board oversees the Trust's strategy to ensure it has the potential to
deliver an attractive investment return for shareholders over the longer term.
The Trust's portfolio is distinctive from others in that it principally
invests in UK-quoted microcap companies, which are defined as those with
market capitalisations of less than £150m.
The enthusiasm for passive indexation strategies has enhanced returns at the
larger end of the market capitalisation range of listed companies over
recent years. The return of the Numis All-Share Index since April 2015 is
ahead of the return from the Numis Smaller Companies plus AIM Index excluding
Investment Companies, but the latter currently lags the Numis 1000 Index ex
ICs. This index (which represents the aggregate return of the smallest 2% of
the UK stock market) does not include AIM stocks. Alternative markets, such
as AIM, have been particularly impacted by negative sentiment towards the UK
and smaller companies.
The longer-term pattern since 1955 is the exact opposite, and once this
pattern returns, there is scope for the Trust to deliver unusually strong
returns that greatly outpace all the comparative indices. However, over the
past six months, the Trust's total return NAV (including dividend income) fell
by 15.5% which compares with a negative total return on the Numis 1000 Index
ex ICs of 9.1%.
Results for the Half Year to 31 October 2023
· Over the half year, the Ordinary share NAV fell from 64.20p on 30
April 2023 to 54.10p on 31 October 2023, a fall of 15.5% (including
re-invested dividend).*
· The Ordinary share price moved from 59.90p at the end of April 2023 to
47.50p at the end of October 2023, a decrease of 20.0% (including re-invested
dividend).*
· A profit of £47,000 in the half year to 31 October 2023 has been
credited to revenue reserves.
· Redemption requests of 18.7% of the Company's issued share capital were
received and accepted, with the redeemed shares cancelled after the period
end on 2 November 2023.
· The annual redemption mechanism offers investors the chance to redeem
part or all of their holding, addressing any imbalance between buyers and
sellers of the Trust's shares, and helping to maintain a relatively tight
share price discount.
Summary of the results
Half Year to Year ended
31 October 30 April
2023 2023
Total net assets attributable to equity shareholders (£,000) 51,202 60,754
NAV per Ordinary Share* 54.10p 64.20p
Share price (mid) 47.50p 59.90p
Discount to NAV* (12.20)% (7.32)%
Investment income £0.3m £0.8m
Revenue return per Ordinary Share 0.05p 0.03p
Total return per Ordinary Share* (9.94)p (28.93)p
Ongoing charges(#*) 2.00% 1.72%
Ordinary shares in issue 94,638,561 94,638,561
* Alternative Performance Measure ('APM'). Details are provided in the
Glossary, see Half Year Report.
(#) The ongoing charges are calculated in accordance with AIC guidelines.
Chairman's Statement
I am starting this review by looking at a number of changes that have evolved
in the UK equity market.
For several reasons, UK equities have been deeply out of favour with both
domestic and international buyers, and especially since the Brexit vote in
June 2016. The valuations prevailing in the US market have persuaded companies
either to move there (for instance CRH and Wolseley) or to relist there (e.g.
ARM Holdings). The UK currently represents only a 3.5% weighting in world
indices compared to 10% in 2000. This is a precipitous decline, mirrored by
the collapse in the number of UK listed equities overall. There were some
3,000 listed companies in 1997 as against just 1,213 today, a number that is
being steadily eroded by an accelerating trend of takeovers, barely offset by
a feeble number of Initial Public Offerings. In this calendar year to date,
over 30 companies have already been acquired, mostly by foreign companies, or
are in the final stages of being so. Unless swift government action is taken,
the risk to London's position as the premier global financial centre is very
real.
Domestic institutions, predominately pension funds and insurance companies,
have been dramatically cutting their weightings in UK equities. They owned
more than half the market in the 1990s. Now they own just 4%, as they have
conformed to world index weightings. Contrarians should find valuations
attractive, with UK equities trading on around 11 times 2023 earnings per
share, versus Continental Europe on 14 times and the US on 20 times. You might
reasonably wonder how relevant this is to the performance of the Company. In
short, the macro trends affecting UK equities have been felt most acutely at
the lowest market capitalisation end of the market. The SmallCap index has
lost around 5% of its constituents this year thus far, suffering a 20%
reduction in its market capitalisation as a result.
Thanks to the inexorable retreat from UK small cap equities, hastened by
attractive 5%+ yields on short-dated gilts, the market has been 'offer' only,
except in a rare few companies. Nowadays, market makers hold very little
inventory and even sales of small quantities of stock are sufficient to
trigger double digit percentage falls in prices. The flip side is that when
the mood music changes, the gains in the better companies will be explosive.
The foundations for big gains in the next small cap bull market are being laid
now, for those brave enough to invest in quality stocks with solid balance
sheets in the AIM sector. The Numis Alternative Markets index peaked on 6
September 2021 and, by the end of October this year had fallen 46.8% - that is
some bear market!
Trust returns since issue in April 2015
Over the six months to 31 October 2023, your Manager struggled valiantly
against the receding tide, making a small amount of relative headway. The
Numis Alternative Markets index ex ICs, covering AIM listed stocks, was down
16.2%, while the Numis Smaller Companies Plus AIM Index ex ICs fell 12.2%
(quoted in total return terms including dividend income). The Trust's
portfolio includes relatively few stocks that pay dividends, so its Revenue
per Share amounted to 0.05p over the half year. This is usual for this
portfolio, and similar to the first half last year. It was always anticipated
that nearly all the return of the Trust will be delivered from microcap stocks
generating substantial cash surpluses as they mature, when their share prices
generally appreciate substantially. During periods of sustained adverse stock
market sentiment, however, microcap share prices can fall to what appear to be
exceptionally low valuations. Over the half year, the market pattern was
adverse, so the Trust's NAV total return fell 15.5%, slightly better than the
Numis Alternative Markets index, but somewhat behind the Numis Smaller
Companies Plus AIM Index ex ICs. The Revenue per Share above is included in
this figure.
Since 1955, UK quoted microcaps have substantially outperformed all other
parts of the UK stock market, although this does include lengthy periods when
microcaps have underperformed. Since the Trust was launched in April 2015, UK
microcaps have suffered two periods of weak sentiment and, therefore, weak
returns. The first period started in July 2018, when Parliamentary gridlock
held up negotiations with the EU about the UK's leaving terms. The adverse
sentiment worsened further in early 2020 with the onset of the global
pandemic. Between July 2018 and March 2020, the Trust's NAV total return fell
by just under 42%. The second period of microcap weakness has been in place
since October 2021, due to the marked shift towards indexation strategies that
has favoured large and mega cap outperformance. Microcap sentiment has been
persistently weak over this period, and as a result the Trust's NAV total
return has fallen by 48.2% over the last two and a half years.
The predominant trend since 1955 has been of UK microcap outperformance. When
microcaps are in favour, the Miton UK Microcap Trust strategy has shown that
it can deliver very substantial NAV total returns. Between March 2020 and
April 2021, for example, its NAV total return was over 150%. However, since
launch, the two periods of weak sentiment towards microcaps have meant that
the Trust's NAV total return since April 2015 has only been 13.0%. This
appreciation compares with a rise of 31.7% of the Numis 1000 Index ex ICs and
a flat return from the Numis Alternative Markets Index ex ICs. The first of
these has been enhanced by some of the largest constituents outperforming the
microcap end due to the indexation trend noted above. We look forward to a
return of the long-term trend of microcap outperformance which has been in
place since 1955.
Market valuation of the Trust and share redemptions
Investment trusts are, by some margin, the most suitable vehicle for investing
in quoted microcaps because the returns from investing in an equivalent OEIC
tend to be compromised by the flip-flop of daily subscriptions and
redemptions. The underlying holdings are generally less liquid and forced
selling can depress their share prices. It mystifies me as to why the
regulators allow illiquid assets, such as commercial property, to be marketed
to investors under the OEIC structure, given the numerous cases of such funds
being suspended during periods of market turmoil and therefore investors'
access to their cash frozen. The mismatch between ongoing buyers and sellers
within an investment trust strategy, by contrast, is reflected in the trust's
share price relative to its underlying NAV. When there are few buyers for a
sustained period, investment trust share prices can trade 10%, 20% or even
more below their underlying NAVs.
To minimise this risk, the Trust offers all investors a redemption opportunity
once each year. This mechanism addresses the imbalance between buyers and
sellers, with the result that MINI's share price discount normally remains
modest compared with others in the peer group. The redeemed shares are
sometimes placed with an institutional buyer at NAV. If there are insufficient
buyers, then the redemption shares are either cancelled via portfolio cash or
a similar percentage of the Trust's portfolio is transferred to a Redemption
Pool and sold so that cash can be raised independently and distributed to the
redeeming shareholders.
During this period, we once more offered our shareholders the option to redeem
their shares and I would not be honest if I did not say that we were
disappointed that 18.7% of shareholders elected to avail themselves of this
opportunity. By our calculations, some 9% of the shares in issue and being
redeemed were held by arbitrageurs. Given the size of this redemption, your
directors decided that it was in the best interests of all shareholders to
place the redeemed shares into a separate Redemption Pool, to be carefully
liquidated over a period of time after the 2 November Redemption date. We
judged that it was in no one's interest precipitately to dispose of large
holdings of relatively illiquid shares. Based on past experience, we hope to
have completed this exercise by early 2024.
Shareholders may be aware that, from the inception of the Trust in April 2015,
the directors placed a 2% cap on management charges, so the costs of running
the Trust will not rise exponentially if the share price were to decline much
further. Naturally, we hope that the faint signs of life which we are
detecting at the smallest end of the UK equity market, will strengthen as we
move into 2024.
MINI's share price has, on average, traded at 4.6% below its NAV since launch,
a considerably better outcome than nearly all other trusts in our peer group.
We believe that this outcome in part vindicates the existence of the Trust's
redemption facility.
An additional advantage of the redemption facility is that it makes it easier
for large investors to exit in size once a year. Overall, the Trust has issued
almost £40 million of additional capital and returned nearly £60 million to
redeeming shareholders since 2015. The recent redemption of c.17.7 million
shares on 2 November 2023 is included in the £60 million figure.
Board Refreshment and Change of Service Providers
The Board has staggered the retirement of the original directors so that new
directors join the board progressively, enabling subsequent succession
planning to be undertaken in an orderly fashion. Currently the average term of
the board directors is 5 years and 2 months. Louise Bonham, who joined the
Board on 15 December 2022, will take over from Peter Dicks as Chair of the
Audit Committee on 1 November 2024. Peter will retire from the Board on 31
December 2024.
Following a review of service providers, the Board has appointed subsidiaries
of Northern Trust as company secretary, fund administrator and depositary with
effect from 4 March 2024. These changes will result in a considerable saving
for shareholders.
Prospects
Historically, UK quoted microcaps have delivered returns well above those of
UK large caps, even through periods of unsettled economic conditions. During
globalisation, although UK microcaps did outperform UK large caps, the extent
of this was unremarkable, as companies with rapid growth prospects, such as US
technology stocks, greatly outperformed during these decades. However, when
international relationships fragment, companies generating a stream of good
and growing dividends have an advantage and typically outperform. At the time
of the Trust's launch in April 2015 your Manager anticipated that global
market trends were set to go through this transition.
Over the last three years, UK stock market sentiment has remained weak. But
even so, as the globalisation trend has faded, it is noteworthy that UK large
caps, typically capital-intensive businesses paying out a stream of good and
growing dividends, have now started to outperform nearly all other
comparators. Whilst UK large caps have now started to generate premium
returns, the usual pattern of UK microcap outperformance has not been evident
over the last three years.
The key point is that market sentiment can change dramatically, as it did
after March 2020 when UK quoted microcaps, and this Trust in particular,
generated very strong returns. Against this background, UK microcaps appear
overdue for a period of major performance catch-up. Furthermore, if UK
mainstream equities continue to outperform international peers, and if the
usual trend of UK microcap outperformance of UK large caps continues as it has
since 1955, then the Trust has the prospect of delivering returns that outpace
those of most international strategies. Your Managers, through extensive
research, believe that they can add further upside to Trust's returns, and
that a new market trend such as this will remain in favour for some decades.
Ashe Windham
Chairman
13 December 2023
Investment Manager's Report
Which fund managers have day-to-day responsibility for the Trust's portfolio?
Since the launch of the Trust in April 2015, the day-to-day management of the
Trust's portfolio has consistently been carried out by Gervais Williams and
Martin Turner.
Gervais Williams
Gervais joined Miton at March 2011 and is now Head of Equities in Premier
Miton. He has been an equity fund manager since 1985, including 17 years at
Gartmore. He was named Fund Manager of the Year by What Investment? in 2014.
Gervais is also the President of the Quoted Companies Alliance and a member of
the AIM Advisory Council.
Martin Turner
Martin joined Miton in May 2011. Martin and Gervais have had a close working
relationship since 2004, with complementary expertise that led them to back a
series of successful companies. Martin qualified as a Chartered Accountant
with Arthur Anderson and had senior roles and extensive experience at Merrill
Lynch and Collins Stewart.
What were the principal stock detractors and contributors to portfolio returns
over the half year?
Although UK quoted microcap share prices have been weak over the two years to
April 2023, their returns remained weak again over the half year under review.
Specifically, the valuation of government bonds fell further due to persistent
inflationary pressures. Even quoted companies, paying good and growing
dividends, suffered a degree of share price weakness. In the last two years,
investor sentiment regarding less mature stocks, such as small and microcaps,
continued to be very poor.
The three biggest detractors to the Trust's return over the half year were
Cyanconnode, Totally and MTI Wireless. Cyanconnode is one of the portfolio's
largest holdings. We note that it is already one of the largest suppliers of
smart utility meters to India, at a time when they are about to install very
large numbers of meters. As yet, the Indian utility companies have not awarded
many contracts, testing the patience of shareholders. We remain upbeat that
substantial contracts will be announced in the coming quarters.
Totally is a business that administers part of the 111 service for the NHS and
provides other services. With some of its current contracts concluding, and
few out to tender at present, profitability has dipped. We anticipate an
increase in future contract activity, even if there is a change of government.
In the case of MTI Wireless, this aerial and irrigation control business
continues to generate ongoing growth in profits and dividends, but as it
operates in Israel, its share price was weak in October due to worries about
potential local economic disruption.
Importantly, in each case, the businesses themselves remain well financed with
net cash balances, and in our view their prospects remain strong. In common
with other quoted microcaps they have the potential for their share prices to
appreciate by a multiple of their current valuation. But, as all three are
significant portfolio weightings, their weak share prices over the half year
have collectively detracted 3.6% from the Trust's returns.
Microcap share prices have been weak for some time. Over the half year to
October the Numis 1000 Index ex ICs was down 9.1%, and indeed it has fallen by
23.9% over the last two and half years. The NAV return of the Trust has
declined by 15.5% over the last six months, and 48.2% over the last two and
half years. All these figures are quoted in total return terms, including the
contribution from dividends.
Despite these bleak figures, as outlined elsewhere, we believe the upside
potential for the Trust remains unusually strong. In the period up to March
2020 for example, the Trust's NAV total return also fell severely, but
thereafter its NAV total return then rose dramatically, easily exceeding its
previous highs. Very few of the Trust's holdings have generated these kinds of
returns at a time when UK microcap sentiment is so poor. Yu Group is an
exception, as its prospective net cash balances are increasing so fast that
they would have been several multiples of its earlier market capitalisation if
its share price had not also appreciated significantly.
This is the key to our confidence in the Trust's strategy. The share prices of
UK microcaps such as Yu Group often have an option-like upside, so when they
come right, an individual stock alone can deliver substantial upside for the
Trust. In the six-month period, Yu Group has enhanced the Trust's return by
3.3%, almost matching the Trust's three worst detractors. In more favourable
times, there is potential for a number of UK microcaps to rise by a multiple
of their current share prices, and hopefully relatively few that will suffer
severe share price setbacks.
Has the manager maintained or extended the PUT Option protection that was
previously in place?
Towards the end of the period under review, we added to the trust's existing
FTSE100 Put option with a term to December covering just over half of the
portfolio, with an additional FTSE100 Put that extends to June 2024, as we
felt that the cost of such Puts was very modest at the time of purchase. The
combined effect is that the portfolio has around 95% insurance against stock
market crashes up to mid-December, with just under half of the portfolio
covered thereafter up to mid-June 2024.
The key advantage of investing in a FTSE 100 Put option is that at times of
major market setbacks, the valuation of the Put option rises, which can then
offset a part of the decline of other portfolio holdings. During the March
2020 setback for example, the Trust was able to take profits on its FTSE Puts
after they had risen. It then bought more UK microcaps with the additional
cash, at a time when their share prices were low. This process boosted the
returns of the Trust through the market setback and the subsequent recovery.
In the light of the substantial decline in the Trust's NAV over the last two
and half years, to what degree have the longer-term prospects of the portfolio
holdings deteriorated?
Following the global pandemic, and the contemporaneous financial stimulus,
many of the previous economic bottlenecks have now been resolved.
Unfortunately, these factors have been replaced with new challenges that are
also expected to become ongoing headwinds for forthcoming corporate
profitability. These include:
1. With the rise of inflation, interest rates have been raised
dramatically, and this is expected to suppress economic activity after a time
lag. There have also been a number of geopolitical events that are expected to
weigh on the potential for global growth, most notably the Russian invasion of
Ukraine, and the Israeli/ Hamas conflict. In addition, there are a growing
number of tariffs being imposed on specific industry subsectors by one country
importing or exporting to another.
2. With the phasing out of Quantitative Easing and the introduction of
Quantitative Tightening, government issuance of bonds is now a substantial
liquidity drain on asset markets. Additionally, many banks have suffered a
drawdown in deposits, so they have often tightened lending criteria, and in
many cases are reluctant to lend as much as they have in the past.
Whilst there have been some profit warnings to date, the UK economy has not
yet fallen into recession. Even so, elevated interest rates are expected to
bite in time.
The effect is that the advantages of being a well-financed company are more
significant when financial conditions are more difficult. Specifically, if
competitors fail, a well-financed business can expand into the vacated
markets. Well-financed businesses can also acquire overindebted, but otherwise
viable businesses, debt-free from the receiver, often for a nominal sum. The
upside potential for quoted small caps of these deals tends to be greater than
large caps, as the value-add of an acquisition typically has a larger impact
when the acquirer is smaller.
In conclusion, the prospects for some portfolio companies have deteriorated,
and these have been sold. Meanwhile, whilst a forthcoming recession might be a
challenge for any business, the advantages for well-financed businesses can
sometimes improve, especially if they are quoted microcaps. Hence, we remain
enthused by the potential trajectory for the share prices of well-funded,
quoted microcaps from here, especially when set in the context of share prices
that at present are often standing at multi-year lows at present.
The Trust's NAV total return has only been 13% since launch in April 2015, and
geopolitical risks are rising. Surely, these factors have reduced your
confidence in the upside potential for the strategy?
Since the Trust was first launched in April 2015, UK microcaps have suffered
two periods of weak sentiment that has held back their longer-term potential.
1. The first extended from July 2019 when Parliamentary gridlock hindered
negotiations with the EU about the UK's leaving terms. UK microcap sentiment
worsened further in early 2020 with the onset of the global pandemic. Overall,
between July 2018 and March 2020, the Trust's NAV total return fell by just
under 42%.
2. The second covers the last two and half years since April 2021, when the
allocation crescendo toward indexation strategies favoured large and mega cap
outperformance. Consequently, UK quoted microcap sentiment has been
persistently weak with the Trust's NAV total return declining by 48.2% between
April 2021 and October 2023.
Despite these setbacks, the reason we initiated the launch of this Trust was
because UK quoted microcaps have greatly outperformed all other parts of the
UK stock market since 1955 (the date when detailed stock market data was first
compiled). Whilst there are periods when microcaps do underperform, these are
greatly outweighed by long periods of microcap outperformance. Over the past
68 years, the trend has been that the return on a UK quoted company has been
inversely related to its market capitalisation. In aggregate, the smaller the
listed company, the better its longer-term return.
Given this data, we find it noteworthy that the trend of UK microcap
underperformance ended abruptly in 2020, when Covid-19 struck and the global
economy suddenly entered a serious recession. Large caps are better positioned
to dodge the bullets during recessions because they have such large market
positions. Typically, their prospects are closely related to the fluctuations
of the global economy.
Recessions are challenging, however, and the ongoing geopolitical risks a
worry for all businesses including microcaps. But, interestingly, these
conditions are an advantage for well-funded businesses that are immature and
small. First, being small, they have a greater chance of replacing any sales
lost to a recession by taking market share elsewhere. Second, when a
competitor fails, or a microcap makes an acquisition from the receiver, the
upside potential tends to be much greater than for a large cap. With a small
market capitalisation, the scale of the potential added upside is often much
more meaningful for the combined businesses. Given these factors, we were not
surprised that the Miton UK Microcap Trust's NAV total return rose more than
150% between March 2020 and April 2021, despite the challenges of the pandemic
and the global recession.
Clearly, we are disappointed that the Trust's total return NAV has only been
13% since launch in April 2015. Unfortunately, this period includes the two
periods of weak microcap sentiment as explained above. The Trust's return has
lagged a rise of 31.7% in the Numis 1000 Index ex ICs, although it is ahead of
the flat return from the Numis Alternative Markets Index ex ICs since issue.
To a degree some of the largest index constituents may have outperformed due
to the impact of the indexation allocation trend noted above.
Total returns from launch to 31 October 2023
Numis All-Share Index 40.4
Numis 1000 Index ex ICs 31.7
Numis Smaller Companies Plus AIM Index ex ICs 25.2
MINI NAV 13.0
We do highlight, however, that the 'nifty fifty' large cap stocks also
conspicuously outperformed in the 1960s and early 1970s, a stock market
pattern that is reminiscent of the present. Thereafter, as the trajectory of
the global economy weakened due to the oil price crisis and geopolitical
risks, UK microcaps went on to outperform large caps substantially for many
decades.
In short, despite the recent adverse sentiment haunting UK quoted microcaps,
we believe that the potential for the Trust's strategy has not diminished.
Indeed, we note that numerous UK quoted microcaps are currently standing on
what appear to be low valuations that are completely unjustifiable, so their
upside potential may be even greater than normal this time round.
Will the lesser liquidity of the UK quoted microcap investment universe remain
a bar to institutional capital in future?
During the globalisation decades, most investors have gradually become
accustomed to investing more internationally, and typically in strategies with
elevated risks and greater upside potential.
1. In stock market terms, this might have included US 'unicorns' (high
growth stocks that have typically drawn down very substantial capital sums to
build a market position that they hope eventually becomes very valuable).
2. In bond market terms, it has typically involved investing in long-dated
bonds so that as bond yields fell, they had greater upside potential.
3. In borrowing terms, it has also included double or triple geared index
ETFs or private equity funds with geared upside potential combined with the
advantage of paying ever lower interest costs.
As a result over the past several decades, most investors have reduced their
UK equity weightings and scaled up their capital participation in strategies
with extra risk and upside.
In this context, we find it interesting that, with the problems of inflation
and the decline in bond valuations, the FTSE100 Index has now moved to become
amongst the best performing of all global stock markets over the last three
years. This is remarkable, as most local investors have continued the trend of
selling the UK to invest elsewhere, yet this has not stopped the UK stock
market outperforming.
As it is, the Trust's investment universe includes more than half of all UK
quoted companies. For now, most professionally managed UK small cap strategies
seldom research the potential of microcaps. However, if UK microcaps do
outperform midcaps from here, then most small cap fund managers will need to
become more accustomed to investing in UK quoted microcaps, or else suffer
underperformance. Importantly, as there is lesser liquidity within microcaps,
a portfolio shift like this will be self-reinforcing, potentially boosting
microcap upside to an even greater degree.
Furthermore, if the global economy is weak in future, and if quoted microcaps
do outperform as significantly as they have in the past, then we anticipate
that even institutional investors will become accustomed to allocating capital
further down the UK market capitalisation range - even into UK microcaps.
These institutions often already hold unquoted companies in their portfolios,
so the liquidity of quoted microcaps in this context will be a considerable
improvement.
What are the prospects for the Trust?
In the answers above, we have attempted to outline why we believe that the
prospects for the Trust's strategy appear unusually strong at present. In this
section, we have sought to cover why we believe the prospects for the Trust
are so compelling on a medium-and longer-term basis.
Historically, UK quoted microcaps have delivered returns well above that of UK
large caps, even during periods of unsettled economic conditions. During
globalisation, UK microcaps continued to outperform UK large caps, but the
outcome was of little interest to institutional investors, as international
strategies investing in large caps with rapid growth prospects, such as US
technology stocks, performed strongly.
But when economic conditions are more unsettled, companies generating a stream
of good and growing dividends have the advantage and typically outperform. At
the time of the Trust's launch in April 2015 the Manager anticipated that
global market trends were set to go through this transition.
As the globalisation trend has faded over the last three years, it is
noteworthy that UK large caps, which typically comprise capital intensive
businesses paying out a stream of good and growing dividends, have now started
to outperform nearly all international comparatives. If UK large caps are now
set to deliver returns ahead of most other comparatives, to what degree should
we be worried that the usual pattern of UK microcap outperformance has been
absent over the last three years?
In our view, this is explainable. As yet, local investors have not changed
their behaviour of prioritising capital allocation to overseas strategies
rather than to the UK. The reason that UK large caps have outperformed over
the last three years is related to the behaviour of international investors
who have started to increase their weightings in low-beta equity income
stocks, such as those within the UK's mainstream stock market index.
The key point here is that market sentiment can change dramatically, and when
a favourable new trend is established, it can remain in place for a very long
period. If UK mainstream equities do continue to outperform international
comparatives, as we anticipate, and if the usual trend of UK microcap
outperformance of UK large caps also returns, then the Trust has the potential
to deliver returns that will outpace those of most international strategies.
This would represent a sea change in stock market trends, and in our view will
justify local investors ceasing to allocate capital overseas and bringing it
back to the UK, where the government is looking to help the stock market in
various ways. And as local investors, they would not just allocate to UK large
caps.
We therefore feel that UK quoted microcaps are at the start of a supercycle
that has the potential to persist for decades. In short, Martin and I believe
the prospects for the Trust's strategy are the best they have been for thirty
years.
Gervais Williams and Martin Turner
13 December 2023
Portfolio Information as at 31 October 2023
Rank Company Sector and Main Activity Valuation £'000 % of Net Assets Yield* %
1 Yu Group Utilities 3,686 7.2 0.6
2 MTI Wireless Edge Telecommunications 1,254 2.4 7.5
3 TruFin Financials 1,231 2.4 -
4 Accrol Group Consumer Staples 1,169 2.3 -
5 DX Group Industrials 1,021 2.0 3.5
6 Cyanconnode Holdings Telecommunications 978 1.9 -
7 Pantheon Resources Energy 965 1.9 -
8 Zinc Media Group Consumer Discretionary 953 1.9 -
9 Shield Therapeutics Health Care 941 1.8 -
10 Frontier IP Group Industrials 913 1.8 -
Top 10 Investments 13,111 25.6
11 Andrada Mining Basic Materials 857 1.7 -
12 Journeo Industrials 824 1.6 -
13 Ingenta Technology 813 1.6 2.7
14 Braemar Industrials 806 1.6 5.2
15 Supreme Consumer Staples 804 1.6 2.9
16 STM Group Financials 737 1.4 1.2
17 Van Elle Holdings Industrials 695 1.4 3.2
18 Savannah Resources Basic Materials 685 1.3 -
19 Serabi Gold Basic Materials 678 1.3 -
20 Zephyr Energy Energy 665 1.3 -
Top 20 Investments 20,675 40.4
21 Enteq Technologies Energy 664 1.3 -
22 REACT Group Industrials 617 1.2 -
23 Ultimate Products Consumer Discretionary 617 1.2 6.0
24 Elemental Altus Royalties Basic Materials 617 1.2 -
25 Avacta Group Health Care 611 1.2 -
26 Marwyn Value Investors Financials 604 1.2 11.8
27 Concurrent Technologies Technology 588 1.2 -
28 CT Automotive Group Consumer Discretionary 579 1.1 -
29 Tirupati Graphite Basic Materials 572 1.1 -
30 Kistos Energy 570 1.1 -
Top 30 Investments 26,714 52.2
Balance held in 92 equity investments 18,198 35.5
Total equity investments 44,912 87.7
Listed Put Option
UKX - December 2023 5,700 Put 16 -
UKX - June 2024 5,900 Put 185 0.4
Total Put Options 201 0.4
Other net current assets 6,089 11.9
Net assets 51,202 100.0
* Source: Refinitiv. Based on historical yields and therefore not
representative of future yields. Includes special dividends where known.
FURTHER INFORMATION
Miton UK MicroCap Trust plc's report and accounts for the half year ended 31
October 2023 will be available today
on https://www.mitonukmicrocaptrust.com/documents/
(https://www.mitonukmicrocaptrust.com/documents/) .
It will also be submitted shortly in full unedited text to the Financial
Conduct Authority's National Storage Mechanism and will be available for
inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) in accordance with
DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and
Transparency Rules.
Enquiries:
Miton UK MicroCap Trust plc
Gervais Williams, Martin Turner, Claire Long Tel: 020 3714 1500
Peel Hunt LLP (Broker)
Liz Yong, Luke Simpson, Huw Jeremy Tel: 020 7418 8900
ISIN: GB00BWFGQ085
LEI: 21380048Q8UABVMAG916
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